Jesse Livermore is known to most as the best market player Wall Street has ever heard about, rivaling perhaps even Gann. Livermore is alleged to have engaged in every single biggest stock and commodities moves from 1910 – 1940. He needed to be doing something right to just have survived monetarily for three decades.
Livermore might be a very good model for today’s computer stock trader. In the Livermore era there was no tv, no computing devices, and no world wide web. Even if were able to afford to pay a staff to chart stocks and futures you would not have had 24×7 immediate access to financial data files to keep those charts up to the minute. Any profitable stock trading system that could stand up to the test of time had to use easy to get data, be clear to understand, and be simple to apply. Contemporary technical analysis tools like stochastics and the elliott wave oscillator were out of the question.
His method was based on a trend following system. Livermore only took positions in the direction of the major trend. He opened his position with a minor stake and added to it as the trend persisted in its expected direction. Jesse Livermore said “Just recognize that the movement is there and take advantage of it by steering your speculative ship along with the tide.”
In or out. Long or short. Regardless of how many gigabytes you might have for your cutting edge, computer-based trading system it all comes down to those two choices. He set objective stop loss levels and bailed out immediately from his entire position whenever a stop was touched. Livermore did not feel pressured to trade each and every single day, neither did he try to catch every jiggle in stock prices. He followed only the major, cyclical trends.
The Livermore System defines the trading ticker in terms of trend and swing. An upswing, for example, is a consecutive series of higher pivot highs and higher pivot lows. An uptrend is a consecutive series of upswings. A downswing is a consecutive series of lower pivot lows and lower pivot highs. A downtrend is a consecutive series of downswings.
Trends and swings are determined by two filters. A larger swing filter and a penetration filter that is one-half the size of the swing filter. A change in trend is a retrace of swing filter size from the last up or down swing. A pivot is the high or low point of each swing. Time is not a thing to consider in the Livermore System or in the making of a swing chart.
Livermore utilized hand drawn swing charts that looked somewhat like a point and figure chart. As a substitute for Xs and Os and box sizes, a Livermore swing chart is a vertical line drawn when prices have moved by a fixed number of points in the opposite direction from the previous high or low pivot.
Livermore utilized penetrations of the pivot points to either add new positions when they occurred in the direction of the trend, or as stop-loss levels when they occurred in a direction opposite to the trend. The Livermore System is somewhat unique because of the role of the penetration filter. Many other swing trading systems use any breakout of a prior pivot high pivot or low pivot as the signal to add positions or as a stop loss level.
All positions were liquidated at the first penetration of a stop-loss level. A second penetration of the next occurring pivot in the direction of the new trend confirmed the new trend. A new trend “failed” when the second confirmation did not occur. In those cases Livermore would reenter in the direction of the prior trend when prices exceeded the size of the swing filter from the failed trend’s highest high or lowest low.
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